Tax optimisation between spouses by applying the ‘statutory property regime swing’ (Güterstandsschaukel) - The opportunities and risks when transferring assets

If applied correctly, the statutory property regime swing can be used to optimally exploit the tax exemptions for the estate planning that is envisaged, or to reduce tax rates. Even in the event of unsuccessful gifting between spouses this ‘swing’ can be helpful in subsequently remedying that. It can moreover be used to reduce the compulsory portion of the estate as well as claims in respect of supplements to the compulsory portion, or to protect assets from being accessed by third parties, but also possibly to create new depreciation potential.
Calculating the equalisation claim in respect of accrued gains
The community of accrued gains is the statutory matrimonial property regime. Spouses who have not concluded a nuptial agreement will be subject to this property regime and will have separate estates. When a community of accrued gains is terminated, the gains that accrued while the community of accrued gains existed have to be equalised between the spouses.
The death of one of the spouses or divorce results in the automatic termination of the community of accrued gains. It can however also be terminated during the marriage while the spouses are alive via a nuptial agreement, and by switching to the separation of property in order to achieve one of the above-mentioned goals.
To determine a claim for the equalisation of accrued gains it is necessary to calculate the value of the assets of each spouse at the starting date and at the end date. Assets that were acquired by one of the spouses through inheritance or gifting while the community of accrued gains existed generally have to be added to the value of that spouse’s assets on the starting date. Deducting the value of the assets on the starting date from their value on the end date will result in the value of the actual accrued gains. Subsequently, the smaller accrued gain needs to be deducted from the larger one. Half of the difference will constitute the claim for the equalisation of accrued gains to which the spouse with the lower accrued gain will be entitled. Pre-emptive gifts between the spouses would be offset against the equalisation claim.
An equalisation claim in respect of accrued gains that arises in this way between living spouses and that has been determined in accordance with legal requirements would not be subject to tax (Section 5(2) of the Inheritance Tax Act [Erbschaftsteuergesetz, ErbStG]). Assets can thus be transferred between spouses in a tax neutral way.
Classic and double statutory property regime swings
In the case of a statutory matrimonial property regime swing, the spouses will have hitherto been subject to the community of accrued gains (whether modified or not). A switch takes place away from the community of accrued gains to the separation of assets (forward swing) and back again to the community of accrued gains (backwards swing).
According to a landmark ruling by the Federal Fiscal Court (Bundesfinanzhof, BFH), this method is recognised for tax purposes. The freedom of contract between spouses pursuant to Section 1408 of the Civil Code (Bundesgesetzbuch, BGB) allows such arrangements and, therefore, they do not constitute an abuse of the law. While the BFH has clarified that there is no need for the separation of assets to be maintained for a minimum period of time, it would nevertheless be advisable to observe a "grace period".
The basic requirement for carrying out a statutory property regime swing is the community of accrued gains. If the spouses have hitherto been subject to the property regime of separation of property and wish to transfer assets in a tax-exempt way, they may retroactively agree to a community of accrued gains (the earliest possible date would be at the start of their marriage); subsequently, they could switch back to the separation of property regime and equalise the accrued gains. Following the equalisation of the accrued gains the spouses can either maintain the property regime of the separation of property, or switch back once again to the community of accrued gains (double or reverse statutory property regime swings)
Under civil law, such an arrangement is likewise possible and effective. The Federal Court of Justice recognises that such a retroactive agreement for a community of accrued gains is permitted on account of the freedom of marital contracts that is specified in Section 1408 BGB. These civil law criteria also have to be taken into account for tax purposes and are explicitly recognised by the BFH. The fiscal administration has however raised concerns here when the focus could be on inheritance-related aims.
Pitfalls in the implementation
The equalisation of accrued gains while the community of accrued gains still exists when there has been no change in the statutory property regime (a so-called flying equalisation of accrued gains) would not be recognised for tax purposes. The statutory property regime would not have been terminated and that is why Section 5(2) ErbStG would not apply. It is therefore not possible to equalise the accrued gains free of tax without also terminating the property regime of the community of accrued gains under civil law.
If the equalisation claim is not settled with cash but, instead, by transferring real estate, securities, business assets or company shares then, while no gift tax may arise, this could nevertheless result in the realisation of hidden reserves. This could have income tax consequences because the transfer might need to be treated as a sale. In order to avoid this, the accrued gains should ideally be equalised in cash or, if applicable, the transfer should take place prior to the termination of the property regime (while providing for this to be offset against the accrued gains claim and for a grace period to be observed). Alternatively, it is also possible to agree to equalise the accrued gains by transferring specific assets prior to the termination of the accrued gains regime. Both alternatives should be backed by an advance tax ruling.
If the spouse who is entitled to equalisation waives an equalisation claim that has already arisen then this might be considered to be a generous gift and could trigger gift tax. In order to avoid this, the waiver should be issued before the claim arises or the claim should correspondingly be modified in the nuptial agreement.
If an equalisation claim in respect of accrued gains is deferred for more than one year without interest then the amount that has to be repaid needs to be split up into a taxable interest component and non-taxable principal component and this, in turn, could result in a gift tax liability.
Opportunities
As already mentioned at the beginning of this report, besides the tax-neutral transfer of assets between spouses, carrying out a statutory property regime swing provides further opportunities:
1. Transfer of assets to children
If the aim is to transfer assets to joint children or grandchildren, it could be a sensible course of action to divide up the assets to be transferred, in advance, between the spouses. By dividing up the assets beforehand they can subsequently be transferred by both spouses instead of just by one of them. In this way, first of all, the tax allowances for gifting can be exploited twice by both spouses. Secondly, the overall amount of assets transferred will admittedly be the same, however, in each case fewer assets will be transferred and this could result in a lower rate of gift tax.
2. Reversal of gift tax
If assets have already been transferred from one spouse to the other and, as a result of this, gift tax was unintentionally triggered then it would be possible to use the statutory property regime swing to reverse the gift tax that has arisen. When the equalisation of accrued gains is effected, gifts between spouses generally have to be offset against the equalisation claim in respect of accrued gains. Through the offsetting the generosity of the gift no longer applies. The gifting is reversed and the gift tax expires retroactively.
3. Reducing the compulsory portion of an estate
The statutory property regime swing could also be a sensible strategy in terms of inheritance law. If the spouse with the higher accrued gains has a potential heir who, in the event of the death of that spouse, would be entitled to a compulsory portion of the estate, then the statutory property regime swing could be used to reduce the amount of that compulsory portion. Through the equalisation of accrued gains, the testator’s assets would be reduced to the benefit of the other marriage partner. As a result, the testator would leave behind fewer assets, which in turn would reduce the value of the compulsory portion claim.
4. Advantages in a financial emergency
A further advantage could emerge in the event that one of the spouses gets into financial difficulties. The transfer of assets via the statutory property regime swing is considered to be a legal claim for consideration. If the spouse that has to make the asset equalisation payment finds themselves in a financial emergency and becomes insolvent then creditors could develop an interest in this equalisation claim.

The crucial difference to a gift - a legal transaction for no consideration - is the shorter contestation period. In the event of a transfer of assets for consideration to a closely related party, which is what happens when the community of accrued gains is terminated, the contestation period is just two years. By contrast, the time period for legal transactions for no consideration, at four years, is twice as long.
5. New depreciation volume
As already described, when transferring assets that are subject to tax for the purpose of equalising accrued gains there is a risk of realising a taxable capital gain. Then again, an opportunity would also present itself here to create new depreciation volume that would be available for tax purposes. This would be the case if, in particular, real estate is transferred by someone who has owned it for more than 10 years, which would mean that this would no longer be taxable. The real estate can be transferred in a tax neutral way from one spouse to the other for the purpose of equalising the gains. The party that is obligated to equalise the accrued gains would be deemed to have effected a tax-exempt transfer and for the beneficiary this would constitute an acquisition. The receiving spouse would then be able to once again offset the acquisition costs against tax.
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